Even though ISS is not the only proponent of ESG ratings, proxy advisors use their own methodologies to rank and score financial companies, in which the reports produced are at times rife with inaccuracies and ultimately sows confusion in the markets. These inaccuracies then consume the bandwidth of financial companies as they scramble to address misstatements that surface in these reports—taking valuable time that could be much better spent on actually improving ESG performance.
Basically, the people at the shareholder and stakeholder level, who actually do want to see financial companies adhere to a set of ESG standards, are the losers in the current system. Instead of having the transparency of financial companies who are actually responsible in terms of ESG, investors are essentially in this conflict-of-interest system where ESG ratings mean nothing, unless change is in fact taking place.
The New ESG Standards For Financial Companies
When thinking of the standards financial company corporate boards need to focus on in their ESG reporting, there needs to be checkbox standards across each environmental, social and governance branch that the financial company reports, where any investor can publicly verify that reporting themself. Without transparency, the system will continue to hurt companies that are supporting ESG goals while benefiting those willing to “game” the system. A transparent system will instead give ESG-conscious investors a leg up in understanding their investments while benefiting companies truly committed to doing the right thing.
Rashida Salahuddin is the president and CEO of The Corporate Citizenship Project. Salahuddin has spent most of her career in public affairs working for a diverse array of companies including in financial services, entertainment and energy. She is spearheading the Corporate Citizenship Project to address the challenges and ethical issues she has seen first-hand in the field of corporate governance. For more information, visit https://corporatecitizenshipproject.com/.